Novartis’ Indian patent application No 1602/MAS/1998 at the Chennai Patent Office on 17 July 1998 relating to a beta crystalline form of imatinib mesylate had initially been rejected by the Controller of Patents under section 3(d) of the Indian Patents Act, 1970 (Act). According to section 3(d), a new form of a known substance is not patentable in India unless the new form showed “enhancement of the known efficacy” of that substance.

Novartis filed writ petitions before the Madras High Court in May 2006, claiming that the Controller erred in rejecting its patent application, and further claiming that section 3(d) was, inter alia, vague, ambiguous, and contrary to the requirements of the Trade Related Aspects of Intellectual Property Rights (TRIPS) of the WTO Agreements. In the challenge to section 3(d), Novartis had argued that this provision is not in compliance with TRIPS and was in violation of the Indian government’s constitutional duty to harmonise its domestic laws with its international obligations under TRIPS. The Madras High Court held that it was not the proper forum to decide whether the Indian patent law was TRIPS compliant or not. Dismissing the petition, the Madras High Court held that section 3(d) was not vague or arbitrary and therefore did not violate the Indian Constitution. Novartis’ challenge to the Controller’s decision rejecting the patent, which was filed before the Madras High Court, was subsequently transferred to the Intellectual Property Appellate Board (IPAB).

Before the IPAB, Novartis had argued that the beta crystalline form of imatinib mesylate had, inter alia, improved bioavailability, lower hygroscopicity, improved thermodynamic stability and improved flow properties. The IPAB, in 2009, upholding the Controller’s decision, interpreted the term “enhancement of the known efficacy” to mean improved therapeutic efficacy of the new form and not merely improved bioavailability or improved physical properties. Novartis then appealed against the IPAB’s order before the Supreme Court.

The apex court of India upheld the IPAB’s order refusing grant of a patent to Novartis’ product. According to the judgement, in case of chemicals and especially pharmaceuticals if the product for which patent protection is claimed is a new form of a known substance with known efficacy, then the subject product must pass, in addition to section 2(1)(j) and 2(1)(ja), the test of enhanced efficacy as provided in section 3(d) read with its explanation. With regard to the interpretation of the term “enhancement of the known efficacy”, the Supreme Court reasoned that “not all advantageous or beneficial properties are relevant, but only such properties that directly relate to efficacy, which in case of medicine, as seen above, is its therapeutic efficacy.” The Supreme Court decided that Novartis’ product fails to qualify as an invention under section 2(1)(j) and 2(1)(ja) and also fails the test of patentability under section 3(d).

The Supreme Court decision this morning makes it very clear that in order to obtain a patent for a new form of a known substance in India, the applicants must show in their patent specification, sufficient proof that the new form of a base compound of known substance is therapeutically more efficacious than the base compound or known substance. Experimental data to establish that the new form has a therapeutic advantage will be essential in determining whether the new form will qualify for a patent in India vis-à-vis section 3(d) of the Act.

]]>Merger filing with the CCI: of invalid noticeshttp://legalknowledgeportal.com/2013/07/23/merger-filing-with-the-cci-of-invalid-notices/
Tue, 23 Jul 2013 08:29:23 +0000http://legalknowledgeportal.com/?p=3567On 21 December 2012, the Competition Commission of India (CCI) approved a combination for which the notice was jointly filed by Aditya Birla Nuvo Limited (ABNL), Peter England Fashion & Retail Limited (PEFRL), Indigold Trade and Services Limited and Pantaloon (Retail) India Limited (PRIL) pursuant to a scheme of arrangement entered into by the parties. The combination related to the acquisition of the undertakings, business, activities and operations of PRIL pertaining to the Pantaloons Format Business by ABNL through its wholly owned subsidiary PEFRL by way of a demerger in consideration of which equity shares of PEFRL were to be issued to shareholders of PRIL.

However, the CCI had declared invalid the previous filing jointly made by these parties for the same proposed acquisition by an order dated 14 August 2012 (Order). The invalid filing was made by the parties on 16 July 2012.

The initial, invalid, filing in respect of the acquisition of the Pantaloon Format Business of PRIL by ABNL was made by the parties to the combination subsequent to the execution of a Memorandum of Understanding (MoU) for giving effect to a series of related transactions, which primarily included the demerger of the Pantaloons Format Business from PRIL and its merger with a wholly owned subsidiary of ABNL under a Scheme of Amalgamation (Scheme) before the relevant High Court(s). However, on the date of making the filing, the parties’ respective board of directors had not finally approved the Scheme.

The parties had believed that their MoU bound them to the proposed arrangement. Therefore, the signing of the MoU, triggered the pre-merger filing with the CCI in accordance with the provisions of the Competition Act, 2002 (as amended) (Competition Act).

The CCI however, found that first, the MoU was not in fact a binding document, and that second, the board approvals were the real triggers to filing in this case.

The Order, contrary to common perception, is not an exposition on when parties should consider themselves bound by the terms of MoUs that they sign, nor does it suggest that any form of conditionality would affect the binding nature of the arrangement between parties. Conditions precedent and conditions subsequent to the completion of a transaction are routine in transaction documentation.

The Order, in fact, focuses, on a rather mundane aspect of the interpretation of Section 6(2) of the Competition Act. The Section 6(2) states that parties to the combination have 30 days from either of two triggering events to make the filing with the CCI. The two triggering events could be either the execution of an agreement or binding document, or, the date of the board approval in case of mergers and amalgamations.

Section 6(2) is quite clear: parties must file within 30 days of triggering one or the other of the two events i.e., the execution of an agreement or other binding document or, the board approval, depending on the method of giving effect to the acquisition.

An agreement is usually executed for transactions involving the acquisition of shares, assets, voting rights or control. The board approval trigger pertains to acquisitions effected through a court approval process involving a scheme for merger or amalgamation. This distinction between the methods of acquisition for the purposes of merger regulation is arguably irrelevant because an acquisition is after all, an acquisition, irrespective of whether it was pursuant to a scheme for merger or amalgamation or by an agreement, written or oral! However, this is a distinction that the Competition Act expressly makes and it must therefore be adhered to.

To be fair to the draftspersons of the Competition Act, the distinction may not be completely without reason because the finalisation of the actual scheme of arrangement would include details and minutiae that one may not cover in an agreement (whether binding or not) to agree to a scheme of merger or amalgamation.

Another relevant aspect of the initial, invalid, filing made before the CCI is that there was also a Subscription and Investor Rights Agreement (Subscription Agreement) between the parties. From the Order, it appears that this agreement pertained to the INR 800 crore interim investment into PRIL that ABNL would make by subscribing to optionally convertible debentures (Debentures). These Debentures, would convert to 13.15% of PRIL’s equity share capital unless they were

cancelled or redeemed pursuant to the Scheme. It seems that this investment was purely a financial transaction with few or no significant investor’s rights in the management and affairs of PRIL. This Subscription Agreement also only provided for the acquisition of less than 25% of the target’s equity and was therefore exempt from scrutiny of the CCI (under the Schedule I of the CCI’s Combinations Regulations).

Now, the CCI has in the past held that even the acquisition of convertible instruments (such as the Debentures) could trigger a filing with the CCI if such an acquisition amounted to the acquisition of “decisive influence” in spite of there being no acquisition of voting rights.

Had this Subscription Agreement pursuant to which ABNL was acquiring the Debentures in PRIL, involved an acquisition of control or of decisive influence over the affairs of PRIL, there may have been some merit to filing the notice with the CCI upon its execution and in including the Scheme as part of a composite filing triggered by the Subscription Agreement. Even then, one would only have addressed the matter of making the filing after the statutorily correct triggering event. The CCI may still have sought final details of the business proposed to be transferred pursuant to the demerger contemplated under the Scheme.

One could also question the necessity of the statutory requirement that a filing be made with the CCI within 30 days of the triggering events especially when it is quite clear that the regime in India is suspensory, which means that a transaction cannot be completed prior to securing CCI approval. As the initial, invalid, filing in the ABNL case suggests, the parties to a combination are usually quite keen to make a timely filing with regulators.

In any case, the CCI has set a clear precedent, not unreasonably, insisting upon factual finality (or as near finality as possible!) when parties approach it for its approval.

]]>Data privacy and protection law in India: understanding the regimehttp://legalknowledgeportal.com/2013/06/24/data-privacy-and-protection-law-in-india-understanding-the-regime/
Mon, 24 Jun 2013 09:35:55 +0000http://legalknowledgeportal.com/?p=3570Right to privacy has long been read into Article 21 (right to life and personal liberty) of the Constitution of India. However, with the proliferating use of the internet and the exorbitant rise in transfer of data through multiple technologies, the concepts of ‘data privacy’ and ‘data protection’ have started demanding greater attention than ever before. Therefore, such concepts were introduced in the Information Technology Act, 2000 (Act) through Section 43-A (Compensation for failure to protect data) and Section 72-A (Punishment for disclosure of information in breach of lawful contract).

Section 43-A primarily deals with compensation for negligence in implementing and maintaining reasonable security practices and procedures in relation to sensitive personal data or information (“SPDI”). Section 72-A deals with personal information and provides punishment for disclosure of information in breach of lawful contract or without the information provider’s consent.

On 13 April 2011, the Ministry of Communications and Information Technology (MCIT), Government of India, notified the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (Rules). Further, on 24 August 2011, the MCIT released a press note (Press Note) which clarified a number of provisions of the Rules. Amongst others, the Press Note clarified that the Rules relate to SPDI and are applicable to body corporate (i.e. organisation) or any person located in India. The Press Note exempts outsourcing companies in India from the provisions of collection and disclosure, as set out under the Rules.

Essentially, SPDI consists of the following:

– Passwords;

– Financial information such as bank account or credit card or debit card or other payment instrument details;

– Physical, physiological and mental health condition;

– Sexual orientation;

– Medical records and history;

– Biometric information.

Section 43-A of the Act defines ‘reasonable security practices and procedures’ to mean security practices and procedures designed to protect such information from unauthorised access, damage, use, modification, disclosure or impairment, as may be specified in an agreement between the parties or as may be specified in any law for the time being in force…

In light of the above, the Rules now stipulate that the requirement of ‘Reasonable Security Practices and Procedures’ will be satisfied if a body corporate has implemented such security practices and standards and have comprehensive documented information security programmes and policies that are commensurate with the information assets being protected.

The Rules also set out that International Standards (IS / ISO / IEC 27001) is one such standard (Standards) which could be implemented by a body corporate. If any industry association, etc are following standards other than IS / ISO / IEC 27001 for data protection, they need to get their codes (Codes) approved and notified by the Central Government.

The Rules state that the bodies corporate who have implemented the Standards or Codes need to get the same certified or audited by independent auditors approved by the Central Government. The audit is required to be carried out by the auditor at least once a year or as and when there is a significant upgradation of processes and computer resources.

The Rules provide that a body corporate should obtain prior consent from the information provider regarding purpose of usage of the SPDI. The information should be collected only if required for a lawful purpose connected with functioning of the body corporate and if collection of such information is necessary.

The body corporate is required to take reasonable steps to ensure that the information provider knows that the information is being collected, the purpose of collecting such information, the intended recipients and the name and address of the agency collecting and retaining the information. The information should be used only for the purpose for which it is collected and should not be retained for a longer period than is required.

The Rules further provide that a body corporate is required to permit the information provider to review / amend the SPDI and give an option to withdraw consent at any time, in relation to the information so provided. In case of withdrawal of consent, the body corporate has the option not to provide the goods or services for which the concerned information was sought.

The Rulesgive a body corporate the liberty to transfer SPDI to those body corporate(s), located anywhere, who ensure(s) the same / equal level of data protection that is adhered to by the body corporate as per the Rules. However, the transfer may be permitted only if the same is necessary for the performance of lawful contract between the body corporate and information provider or where such information provider has consented to the transfer.

Apart from applicable legal obligations or information sought by Government agencies, a body corporate is required to obtain permission from the information provider prior to disclosure of such information to a third party, unless such disclosure has been agreed to in a contract between the parties.

TheRules require that a body corporate handlingSPDIshall provide a privacy policy. Such privacy policy shall contain the prescribed details such as type of information collected, purpose for collection of information, disclosure policy, security practices and procedures followed, etc. The privacy policy is required to be made available to information providers and is required to be clearly published on website of the body corporate.

According to the Rules, a body corporate is required to designate a Grievance Officer to address grievances of its information providers and should publish the name and contact details of such Grievance Officer on its website. The Grievance Officer is required to redress the grievances within one month.

Undoubtedly, the concept of data privacy and protection is at a nascent stage in India. Framers of the Rules have attempted to adopt ideas from jurisdictions which have long standing and mature data protection regulations. These Rules are only therefore a first step. Stringent implementation of the law and healthy development of the data privacy and protection jurisprudence in the long run is what one needs to watch out for.

Supratim Chakraborty

]]>The companies bill, 2012: an arbitrary means to what end?http://legalknowledgeportal.com/2013/06/06/the-companies-bill-2012-an-arbitrary-means-to-what-end/
Thu, 06 Jun 2013 12:07:00 +0000http://legalknowledgeportal.com/?p=3564India’s growth since 1992 is a result of two complementary factors – a relaxed regulatory regime and the Indian entrepreneurial spirit reflected in successful private enterprise. The Satyam scam and a few other unfortunate instances of corporate greed driven by individual compromise have given the Executive the opportunity to indirectly license private enterprise. The instrument of this example of Executive excess is the Companies Bill, 2012 that received the seal of approval of the House of the People on 18 December 2012 without any debate or discussion by our esteemed representatives. This Bill saw its genesis in 2009 when the Companies Bill 2009 was introduced in Parliament by the then Congress Government. The Bill was referred to a Parliamentary Standing Committee headed by our former Finance Minister, Mr Yashwant Sinha, which suggested certain revisions. The revised Bill in a new avatar was introduced in the Lok Sabha in 2011. Stung by criticism on policy paralysis and hobbled by allegations of scams, in a sudden burst of Executive activity propelled by the prospect of general elections in 2014, the Companies Bill 2012 was created out of the 2011 Bill and rushed through the Lok Sabha in the dying minutes of the 2012 winter session. The Ministry of Corporate Affairs and the Law Minister were quick to point out how efficacious and timely this new law to replace the Companies Act, 1956 was. The Government gave itself congratulatory pats on the back for their decisiveness to root out malpractice in private commercial enterprise. Satyam would now be a distant memory and not an abiding criticism of Government inaction, apathy and some would argue, tacit connivance.

In this backdrop, we need to take a step back and take an objective and holistic view of the new Bill.

The Statement of Objects and Reasons of the 2012 Bill derives its base from the objects of the 2009 Bill. Ostensibly this new law seeks to address the “need to help sustain the growth of the Indian corporate sector by enabling a new legal framework that would be compact, amenable to clear interpretation and respond in a timely and appropriate manner to meet the requirements of ever evolving economic activities and business models while fostering a positive environment for investment and growth.” An additional object is “a need to avoid overlapping and conflict of jurisdiction in the area of sectoral regulations.”For these reasons “a piecemeal re-engineering of the corporate regulatory framework was not considered adequate to enable the systemic changes required…”

Lofty objectives, no doubt, that mask the underlying malice – arbitrary and unreasonable law that will kill private enterprise through the threat of pervasive interference by the Government machinery. I submit that this Bill violates every Indian’s fundamental right to practice any profession, or to carry on any occupation, trade or business without a reasonable restriction in the public interest (Article 19(1)(g) read with Article 19(6) of the Constitution of India).

As Plato said, “Good People do not need laws to tell them to act responsibly, while bad people will find a way around the laws.” Should a Satyam or a Sahara which suggests Executive complicity result in a categorisation of all corporates in India as rotten? The Bill breeds uncertainty and concentrates regulatory power in the hands of the Executive without adequate checks and balances. As a result, the Bill violates our fundamental right to live since it concentrates power in the hands of the Executive, has been passed without legislative deliberation and uses objects to try and hoodwink our judiciary. Private enterprise stands at the altar seeking redemption! As Abraham Lincoln said, “To repeal a bad law, enforce it strictly.” A strict enforcement of the Bill will undo the great strides this country has made to recognise economic free will as a cornerstone of individual self realisation.

Tagore wrote:“…Where tireless striving stretches its arms towards perfection,Where the clear stream of reason has not lost its way into the dreary desert sands of dead habit,Where the mind is lead forward by thee into ever widening thought and action,Into that heaven of freedom, my Father, let my country awake.”

Our representatives seem to have fallen asleep while a Dark Age reminiscent of Emergency could descend on the Indian corporate sector. Cut the goose with the golden egg, so to speak!

Let me illustrate my argument through a few examples from this disastrous legislation:

A company’s incorporation is always subject to Tribunal oversight on grounds of fraud. Therefore, a certificate of incorporation is no longer conclusive. Can a company ever represent that it is validly incorporated in such a case? Can a legal professional ever opine that a company is a legally incorporated entity? If not, how is a company’s personality created?

A company can have an omnibus objects clause without distinction between main and other objects. What then is the objective test to determine the main object of the company? Has the doctrine of ultra vires ceased to exist?

The distinction between a private company and a public company no longer exists in real terms. It is up to the Government to decide to exempt a class of companies “in the public interest.” If the Government chooses to exempt private companies from the purview of certain erstwhile inapplicable provisions like share capital (Sections 85 to 89 of the current Act), further issue of capital (Section 81 of the Act), Meetings (Section 170 of the Act) would this be an exercise of power in the public interest? How is the public interest served through relaxing regulations for a whole class of companies? Thus, the current Act specifically excludes private companies from certain onerous provisions to encourage partnerships to become corporations without turning into illegal associations. The autonomy of private companies fosters corporatisation and streamlines business. Without statutory relaxation, the Bill encourages bureaucratic whim at the expense of conceptual clarity.

Corporate Governance is the most shocking part of the Bill that shows the underlying intent of the law maker. Substitute the Board with the babu seems to be the mantra! The list of excesses is condemnable:-Concept of Independent Director –objective criteria after a subjective – “The Board should think the person integral with relevant experience and expertise.” Who remains? Those in a Government data bank that may be created? Do we in the Indian context really need independent directors when our businesses are promoter driven and not diversified in shareholding? Will a sensible promoter jeopardise his own interests and need the oversight of a person who needs to have expertise without experience? Why would anyone choose to be an independent director when he or she can be held liable for consenting or conniving with the Board or failing to act diligently? Who decides? Schedule IV has a mandatory Code of Conduct with guidelines and principles to be

– adhered to compulsorily – isn’t this an opportunity for more Executive excess?

– Duties of Directors – a series of normative principles with prescription. The directors must act for the interests of his community and environment. Who decides this? – otiose and completely arbitrary. The Executive can rule with an iron fist!

– Related Party Transactions must be both at arms-length and in the ordinary course- why? Does not an arms-length transaction suffice? Thus, even an arms-length transaction cannot be undertaken if it is outside the ordinary course – what is the rationale for this double edged sword?

– Consultants, advisors and experts can be held liable for advice rendered to a company that is considered misleading. Who would want to consult with a company?

– Insider trading applies to all companies! With no market how can a person trade in securities to the detriment of a public shareholder?

– Class action is possible for oppression and mismanagement without meeting the test of just and equitable grounds to wind up a company. The reputational risk of frivolous complaints will result in the death of an honest entrepreneur at the hands of a street smart or crooked one – “survival of the fittest” or is it “survival of the bureaucrat” again?

– Corporate Social Responsibility is an effort to subsidise the Government’s failure to ensure equitable distribution and eliminate leakage of public money to corrupt interests. Why tax the deserving because the Government cannot direct state policy and implementation towards the ideals in Chapter IV of the Constitution?

One rotten egg does not render a basket of eggs rotten and one rotten tomato needs inaction to render all other tomatoes rotten. Do you then blame the person safeguarding the tomatoes or the basket in which the tomatoes are kept?

The answer to regulatory apathy is not an unreasonable law but a more refined process of implementation.

Given the above, does the new Companies Bill achieve its object? Will investment be fostered? Will growth enhance? Is regulatory overlap avoided? Will the Executive take over commerce through patronage rather than do its duty to guide growth through an arms-length assessment of social good and public interest?

In short, is commercial freedom under the threat of extinction in India?

I believe the answer is a resounding Yes!

The Supreme Court in its wisdom laid down important guidelines to determine the reasonableness of exceptions to Article 19(1)(g) of the Constitution in Reliance Energy Limited v. MSRDC Limited1. In sum, the court held that an uncertain process was violative of commercial free will enshrined in Article 19(1)(g) of our Constitution. The Companies Bill leaves 74% of its content to executive determination. Is this a certain law? Oversight of the legislature is non-existent so the Executive can cherry pick and sort and then enforce as it chooses?

As Tolstoy averred “Writing laws is easy, but governing is difficult.”

Res Ipsa Loquitur – The facts speak for themselves.

Ask yourself, is the Companies Bill reasonable or does it violate the underlying basis of commercial regulation which is to allow individuals to transact in what they consider their own best interest rather than the State’s perception of public good? Is a distorted Marxian model back to harm us?

We gave ourselves a Constitution to ensure freedom after colonisation. Are we now to sit quietly and watch the colonisation of private enterprise by public greed?

Is an overhaul required or would a strengthening of the implementation process and a more qualified bureaucracy be the answer? Is our civil service still worthy of its status after such a blatant attempt at usurping individual will?

Quad Erat Demonstrandum (QED)

Ashwin Mathew

1 [2007] 8 SCC 1 (2J) (paras 22-24)

]]>Is the FDI policy reflective of international investment treatieshttp://legalknowledgeportal.com/2013/05/30/is-the-fdi-policy-reflective-of-international-investment-treaties/
Thu, 30 May 2013 07:58:18 +0000http://legalknowledgeportal.com/?p=3561The Supreme Court’s cancellation of 122 2G telecom licenses last year came as a shock to many and particularly foreign investors in the sector. They found themselves in a cul de sac of sorts and were forced to use every trick in the book to find a plausible solution. Amongst the several opinions and strategies that were discussed and debated by experts and investors alike, an intriguing one emerged; the ability of foreign investors to seek protection under the bilateral investment protection or economic cooperation treaties that India has with more than eighty countries across the world.

An International Investment Treaty (IIT) is an agreement signed by two or more nations to build better relations by mutual cooperation with the objective of achieving sustained economic development for both nations. If one considers the fundamental basis of these IITs and exchange control regulations in India, the contradictions are hard to miss. One of the fundamental concepts of these IITs is that of ‘National Treatment’, which means that the host will not discriminate against foreign investors irrespective of whether this discrimination is a result of legal, administrative or other decision making. When countries enter into such IITs they agree that each of them will provide treatment that is ‘no less favourable’ than the way its domestic investors are treated. For example, the Comprehensive Economic Cooperation Agreement between India and Singapore provides that “each party will accord to investors of the other party and investments of the other party, in relation to the management, conduct, operation, liquidation, sale and transfer (or other disposition) of investments, treatment no less favourable than it accords in like circumstances to its own investors and investments.” This principle has been upheld and recognised in several international commercial arbitrations as well. It is therefore exceedingly difficult to reconcile the principle of ‘National Treatment’, with the pricing guidelines set out in the Indian foreign direct policy (FDI Policy). The recently introduced discounted cash flow (DCF) method of valuation and (i) the ceiling price for sale by a foreign buyer; and (ii) floor price for purchase by a foreign buyer of shares of an Indian company certainly discriminate between domestic and foreign investors and is a perfect example of this contradiction.

The second fundamental concept of these IITs is that of ‘most favoured nation’, which requires that a foreign investor must be accorded the highest standard of treatment available to an investor from any other foreign country. Another issue that has been debated extensively in this regard is the meaning of the terms “fair and equitable treatment” and “full protection and security” and its applicability. The FDI Policy specifying shareholding limits for foreign investment in specific sectors like telecommunications, insurance, print media and defense and the requirement of approvals from the Foreign Investment Promotion Board (FIPB) ignores the mandate of the IITs and discriminates against foreign investors.

Most IITs such as the one between India and Singapore provide for a provision dealing with ‘repatriation’ where the parties to the treaty undertake to assure investors of the other country free transfer of their capital and returns on investments. The only exceptions to availing benefits under such IITs are usually conditions such as protection of public morals and maintaining of public order, protection of human life and natural resources, preservation of national treasures and circumstances crucial to protection of security of the countries. Repatriation of proceeds by foreign investors under the present regulatory regime is ridden with restrictions for foreign investors which do not apply to similar investments made by Indian investors. Investments made by foreign investors may also be subject to minimum capitalisation requirements and lock in periods in certain sectors like banking and real estate. The lack of flexibility with respect to returns on investments is certainly an obstacle in the path of foreign investors looking to capitalise on their investments and could be a discouraging proposition for such investors, not to mention, prohibited by the IITs.

The aftermath of the Supreme Court judgment in the 2G case has left behind several disgruntled investors who besides their money also want answers from the Indian government. The world at this time is looking to see what action the Indian government will take to resolve this issue. The government now needs to take a hard look to decide what its next steps should be. Does it want to send out the message that India only claims to be ready to welcome foreign investments into the country but at some level is still hesitant to completely embrace it? Will India be able to comply with its international obligations? If we want to continue to pique the interests of foreign investors, our policies must ensure that foreign investors are not treated arbitrarily merely owing to their foreign nationality. It is important that we are in a position to guarantee other nations that India will uphold the fundamental principles of international law and honour the IITs that it has signed.

Murali Neelakantan
Kaushalya Shetty

]]>Developments in the sahara case after the supreme court judgementhttp://legalknowledgeportal.com/2013/04/09/developments-in-the-sahara-case-after-the-supreme-court-judgement/
Tue, 09 Apr 2013 10:08:56 +0000http://legalknowledgeportal.com/?p=3451The newspapers have been filled with reports on the court proceedings against two Sahara Group companies, Sahara India Real Estate Corporation Limited (Sahara Real Estate) and Sahara Housing Investment Corporation Limited (Sahara Housing) (together, Saharas). It would be useful to note the various proceedings that culminated in an order of the Securities and Exchange Board of India (SEBI) yesterday, attaching all the properties and bank accounts of the Saharas and its promoters.

On 31 August 2012, the Hon’ble Supreme Court of India (Supreme Court) ordered the Saharas to refund approximately INR 174 billion along with an interest of 15 percent, within 3 months from the date of the order (SC Order). They ruled that Saharas had issued unsecured optionally fully convertible debentures (OFCDs) to the public in violation of the provisions of the SEBI Act, 1992, along with rules and regulations made thereunder and the Companies Act, 1956. The Supreme Court had also ordered the Saharas to submit all supporting documents to ascertain genuineness of the investors and refunds made, within 10 days of the SC Order. The SC Order was passed by a two member bench of the Supreme Court consisting of Justice K S Radhakrishnan and Justice Jagdish Singh Khehar.

On 5 October 2012, the Saharas and an investor association filed three review petitions (Review Petitions) before the Supreme Court challenging the SC Order. Subsequently, on 8 January 2013, the Review Petitions were dismissed stating that the grounds of review of a judgement as set out in order XLVII, Rule 1 of the Code of Civil Procedure, 1908, were not satisfied. Further, as a sequel to dismissal, the applications seeking permission for open court listing, intervention and directions / stay were also dismissed. The review petition filed by the investor association was dismissed on the ground of absence of locus standi.

Meanwhile, Saharas failed to submit documents to SEBI within the time stipulated in the SC Order. SEBI issued a letter dated 1 November 2012 asking the Saharas to furnish details of all their bank accounts and properties. On 27 November 2012, Saharas filed 3 appeals before the Securities Appellate Tribunal (SAT) seeking extension of time for submission of documents and requesting SAT to issue directions to SEBI to accept a pay order of INR 51.2 billion for repayment of amounts to OFCD subscribers. Saharas contended that only half this amount was outstanding and the rest had been repaid. SAT, vide its orders dated 29 November 2012 (SAT Order 1) and 20 December 2012, dismissed all the 3 appeals.

Since Sahara failed to refund the stipulated amount of approximately INR 174 billion along with interest of 15 percent within the 3 month timeframe and submit all supporting documents as ordered in SC Order, on 2 November 2012, SEBI filed its first contempt petition against Saharas before the Supreme Court. The contempt petition was heard by the same bench that passed the SC Order. On 6 February 2013, this bench asked SEBI to file a status report within two weeks.

Aggrieved by the SAT Order 1, Saharas filed a writ petition with the Supreme Court. The writ petition was heard by a 3 member bench of the Supreme Court consisting of Chief Justice of India Altamas Kabir, Justice Surinder Singh Nijjar and Justice J Chelameswar on 5 December 2012. The Supreme Court gave Saharas an extension to make payment as follows (i) immediate deposit of demand draft amounting to INR 51.2 billion with SEBI; (ii) the first instalment of INR 100 billion to be deposited with SEBI within the first week of January 2013; and (iii) the remainder, along with the interest to be deposited within the first week of February 2013. The time for filing documents in support of the refunds was extended by 15 days.

Since the Saharas failed to pay both the instalments and submit the entire documents within the extended period SEBI, on 13 February 2013, passed an order (SEBI Order) against Saharas, inter alia, freezing their bank accounts and attaching their properties. Further, the Saharas have also been directed to furnish details of investments, development rights, special purpose vehicles and stakes in other entities. The SEBI Order also freezes the bank accounts / demat accounts and attaches all moveable and immoveable properties held by the promoters of the Saharas, Mr Subrata Roy Sahara, Ms Vandana Bhargava, Mr Ravi Shanker Dubey and Mr Ashok Roy Choudhary. This order was in response to observations by the original bench of the Supreme Court that SEBI needed to act to avoid being held in contempt by the court.

This decision of SEBI has far reaching implications on the business of the Saharas and their promoters. The coming days are likely to see frenetic activity in the Indian courts to mitigate the impact of this order.

An investment adviser is a person rendering investment advice for consideration. The definition seems wide enough to include almost everyone who provides investment advice. However, it does not specify that consideration must be received from the person to whom the advice is being provided. This could, therefore, include those investment advisers who sell products on commission.

Exemptions

Those investment advisers who: (a) are either already regulated under another regulation; (b) advise experienced and seasoned investors; or (c) advise foreign investors, including non-resident Indians and persons of Indian origin are exempt from the provisions of the Regulations. Insurance brokers, pension advisers, agents registered with the Insurance Regulatory and Development Authority are also excluded provided they offer advice solely with respect to investment products. Similarly, professionals like lawyers, chartered accountants and company secretaries are excluded if they provide investment advice incidental to their respective professions.

Who is Covered?

With the definition being very wide and exceptions being very specific, it seems as though the Regulations cast a net around a specific group of advisers. This group mainly constitutes investment advisers who are often self-employed, work independently and who are not registered with or regulated by any other regulatory authority.

Registration requirements for Investment Advisers

The Regulations not only provide for detailed requirements with respect to qualifications but also require an applicant to clearly segregate its various businesses or services. Investment advisers are required to make adequate disclosures to investors with respect to their: (a) background; (b) consideration that they may be receiving from other sources with respect to the products or securities in question; (c) actual or potential conflicts of interest; (d) key features of the products; and (e) warnings and disclaimers in documents and other advertising material of the products. In addition to this investment advisers are required to complete a certain degree of risk profiling before recommending products or securities to investors.

Considering the nature of the registration requirements and the obligations and duties of the investment adviser post registration, it certainly seems like a tall order for the unorganised sector of investment advisers, to whom this seems to be directed.

Impact of the Regulations

Though SEBI’s attempt at organising and regulating a relatively unorganised sector is not misplaced, it seems very unlikely that the specific group of people who the Regulations target will actually be able to meet these requirements. This unorganised sector of investment advisers predominantly consists of individuals and they may find it hard to fulfill the qualification requirements like professional degree and net worth of INR 2,500,000 to even be registered, let alone being able to comply with the post registration requirements.

]]>Government of India introduces competition (amendment) bill, 2012http://legalknowledgeportal.com/2013/02/05/government-of-india-introduces-competition-amendment-bill-2012/
Tue, 05 Feb 2013 11:50:12 +0000http://legalknowledgeportal.com/?p=3237The Government of India introduced theCompetition (Amendment) Bill 2012 (the Bill) in the Parliament on 10 December 2012. The Bill aims to rectify few provisions of the Competition Act, 2002 (the Act) which arose out of suggestions made by the National Competition Policy Committee. The salient features of the proposed Bill are as under:

– While defining turnover of an enterprise, statutory taxes, if any, levied on the sale of goods or provision of services have been excluded;

– Till now vertical agreements covered sale and purchase of goods between enterprises. The Bill has included provision of services as part of commercial transactions likely to be assessed under the Act;

– The reasonable exemption of intellectual property rights has been broadened to include any future/new intellectual property Laws which may emerge from time to time;

– Collective dominance by enterprises and abuse thereof has been proposed to be added in Section 4 of the Act;

– The Government Notification of March 2011 enlarging the definition of “group” by increasing the voting rights from 26% to 50% has been proposed to be made part of the Act thereby replacing the Notification by inserting suitable amendments in the principal Act itself;

– The different assets and turnover thresholds tests for certain class of enterprises for pre-merger filing before the CCI have been proposed and powers have been given to the Government of India to notify different thresholds for different industries in consultation with the CCI. This amendment appears to be in line with the advice given by the Planning Commission of India in respect of the pharmaceutical sector;

– Powers of the Chairperson, CCI have been substantially enhanced as the Bill proposes to make the Chairperson as one of the Members of the Selection Committee while selecting other Members of the CCI. While the status of Chairperson has been distinguished from that of other Members of the CCI but suitable amendments in the definition clause relating to Members have not been made. This infirmity may also give rise to unforeseen complications/difficulties in relation to implementation of Section 10(4) of the Act read with the proposed amendment of Selection Committee relating to other Members;

– The Chairperson will replace the Chief Metropolitan Magistrate, New Delhi while authorizing dawn raids to be conducted by the Director General (DG), CCI. The power to authorize dawn raids by the Chairperson may help expedite cartel/bid rigging investigations but challenge against exercise of such powers on grounds of becoming judge of its own cause is not ruled out;

– Harmonization and the concurrency between the CCI and the sector regulators are proposed to be made a mandatory cross referencing between them from the present discretionary powers available under the Act. Section 21 and 21 (A) have been proposed to be amended suitably thereof;

– Whenever the Commission disagrees with the Investigation Report of the DG it may close the matter being not proved. Concerns were raised by parties aggrieved by such orders since the principal law did not provide an opportunity of appeal against such orders. These infirmities have been proposed to be remedied by suitable amendments in Sections 26 and 53A of the Act. In case the CCI decides to impose pecuniary penalties against cartels and bid riggings post completion of inquiry, an opportunity of being heard is proposed to be given parties before imposition of penalties and suitable insertions have been proposed to be made in Section 27 of the Act;

– Waiting period for any merger notification has been reduced from 210 days to 180 days and necessary amendments thereof have been proposed in Section 31(11) & (12) of the Act. However, corresponding changes in Section 6(2) (A) of the Act have not been made which may give rise to unforeseen complications; and

– The issues relating to joint ventures continued to remain a grey area and distinguishable from international best practices.

]]>Competition commission of India on tyre cartelisationhttp://legalknowledgeportal.com/2013/01/14/competition-commission-of-india-on-tyre-cartelisation/
Mon, 14 Jan 2013 14:07:58 +0000http://legalknowledgeportal.com/?p=3209On 30 October 2012 the Competition Commission of India (CCI) decided that no case of cartelization had been made against 5 major tyre manufacturers in India. This decision provides insight on the evaluation of economic evidence by the CCI.

Background

The All India Tyre Dealer’s Foundation complained to the Government that tyre manufacturers in India were colluding in price and trading malpractices. This case was referred to CCI after promulgation of the Competition Act, 2002 (Act). CCI formed a prima facie opinion of cartelization and ordered an inquiry by the Director General (DG). The DG, in his report, concluded that there was a cartel among tyre manufacturers in India based on economic evidence including (i) price parallelism across the manufacturers related to the net weighted average dealer price of tyres and the percentage change in prices; (ii) positive correlation of data involving production, capacity utilization, cost analysis, cost of sales, margins, etc.

Decision and Reasoning

To arrive at its final decision, CCI first considered various structural factors conducive to cartelization. These included (i) the highly concentrated market for tyre manufacturers where 5 manufacturers control 95% of tyre production. This could give rise to collusion but may also indicate “rational” conscious parallelism where competing firms are conscious of each other’s activities; (ii) the cyclical and predictable nature of demand for tyres; (iii) homogenous products; (iv) competitive constraints of re-treaded tyres and imports; (v) entry barrier caused by the requirement of substantial capital investment; (v) existence of an active trade association. Some of these factors support cartelization while others militate against it. According to CCI, a conclusive determination was only possible based on circumstantial evidence. In this regard, CCI found that: (i) the DG had failed to study the price-cost trend; (ii) the price parallelism methodology was not sound since there was no parallelism in absolute prices and price movement but only in the directional change of prices; (iii) capacity utilization showed mixed trends and suppression of capacity made little sense in light of imports; (iv) there was no uniformity in margin trends; (v) excessive margins were absent and varied from 1% to 10%; (vi) rise in market share of one of the manufacturers was inconsistent with cartelization; and (vii) the activities of the trade association did not contravene the Act. Based on these findings, CCI held that the evidence was insufficient to substantiate the claim of cartelization among tyre manufacturers.

Brief Comment

While CCI’s decision seems to be well reasoned, its evaluation of economic evidence in this case may be at odds with its earlier decision in the cement cartel cases. In a deviation from its past orders, CCI’s decision in this case is under a provision of the Act, which makes appeal to the Competition Appellate Tribunal (COMPAT) possible.

Diminished economic growth, attributed in a large part to “policy paralysis” of the Indian Government, led to sudden and swift action by the Indian Government in late September. Setting aside the shackles of political expediency, the Indian Government decided to introduce changes to the Indian Foreign Direct Investment (FDI) Policy to facilitate foreign investment in the civil aviation sector and the controversial “retail” sector.

Civil Aviation Sector

Under the erstwhile FDI Policy, foreign airlines were not permitted to invest in Indian airlines. Considering the deepening crisis in the debt-laden Indian aviation sector, the Indian Government decided to remove this prohibition and allow foreign airlines to hold up to 49% in Indian airlines (other than Air India), subject to the approval of the nodal Foreign Investment Promotion Board (FIPB), provided:

1 .the investee company has its principal place of business within India;
2. the Chairman of the investee company and at least two-thirds of its directors are Indian citizens;
3. the substantial ownership and effective control of the investee company lies with Indian nationals;
4. all foreign nationals likely to be associated with the investee company, as a result of investment, are approved by the Indian Government from a security standpoint;
5. all technical equipment that might be imported into India as a result of investment must be approved by the relevant authority of the Ministry of Civil Aviation;
6. other applicable regulations are complied with.

The 49% cap subsumes investment under the FDI route and the foreign institutional investment route. Therefore, a company with foreign institutional investment can only get FDI investment up to the difference between 49% and the percentage of foreign institutional investment.

Recent newspaper reports suggest that following this change in the FDI Policy, two private carriers, Jet Airways and SpiceJet, are considering foreign investment from foreign airlines. This has led to a spike in their market value.

Retail

The other major change in the FDI Policy was the amendment to the rules on FDI in the “retail” sector. Prior to September, FDI was only allowed for single-brand retail up to 100% of the capital of the Indian company, subject to the prior approval of the Indian Government and certain other conditions. FDI in any other form of retail was prohibited. The amended FDI Policy has removed the prohibition on FDI in “retail”, modified the conditions applicable to FDI in single-brand retail and permitted up to 51% FDI in multi-brand retail, subject to various conditions. By this move, the Indian Government has really bitten the bullet of sensitive foreign investment reforms since multi-brand retail was perceived as an “untouchable sector” owing to its political sensitivity.

Single-brand retail involves the sale of products under a recognized brand owned or licensed to the foreign investor as opposed to multi-brand retail which involves the sale of products under a number of brands, not necessarily owned by the foreign investor. Multi-brand retail is commonly understood as a supermarket format as opposed to an exclusive outlet format, which is single-brand retail. With the fast pace of economic growth in India, consumerism is on the rise, making the “retail” sector an attractive investment opportunity. Add to this the fact that “organized” retail (supermarket chains as opposed to “mom and pop” stores) constitutes only a small percentage of the overall “retail” market, which is expected to treble in the next decade and the growth potential of this sector becomes apparent.

After the amendment, FDI in single-brand retail is now permitted up to 100% of the capital of the Indian company, subject to prior approval of the Indian Government (both the Department of Industrial Policy and Promotion (DIPP) and FIPB must approve the proposal unlike other sectors where only FIPB approval is necessary), provided:

1 . products are sold under a single brand;
2. products are branded during manufacture;
3. products are sold under the same brand in one or more countries outside India;
4. the brand is owned or licensed to the foreign investor;
5. for FDI above 51%, 30% of the products purchased by the Indian company are sourced from India, preferably from micro, small or medium enterprises (MSMEs), village and cottage industries or artisans and craftsmen. This sourcing requirement is a five year average in the first instance after FDI is received and an annual requirement thereafter. Further, this requirement must be self certified by the Indian company and audited by its statutory auditors.

Following the amended rules, Pavers England appears to be the first foreign investor who has been permitted to operate single-brand retail in India through a wholly owned subsidiary. IKEA’s massive proposed investment of nearly US$1.5 billion for single-brand retail through a wholly owned subsidiary has been approved by DIPP and is awaiting FIPB approval.

FDI in multi-brand retail is now permitted up to 51% of the capital of the Indian company, subject to prior approval of the Indian Government (similar to single-brand retail), provided:

1. the relevant State or Union Territory in which the operations are to be introduced has permitted FDI in multi-brand retail. Currently, 9 (out of 28) States (Andhra Pradesh, Assam, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan and Uttarakhand) and 2 Union Territories (Daman & Diu and Dadra & Nagar Haveli) permit FDI in multi-brand retail
2. at least US$ 100 million is invested by the foreign investor;
3. 50% of the FDI amount is invested in back-end infrastructure (the supply chain), excluding the cost of front end-units, land and rentals;
4. 30% of products purchased by the Indian company are sourced from Indian “small industries” (total investment in plant and machinery does not exceed US$ 1 million). The compliance parameters are the same as single-brand retail;
5. the population of the cities where retail operations are set up exceeds 1 million as per the 2011 census or a city(ies) of choice for States without cities that meet the population threshold or is within 10 kms of the municipal limits of such cities.

Fresh agricultural produce need not be branded for multi-brand retail but the Government would have the first right of procurement over agricultural products.

Considering the conditions for FDI in multi-brand retail, the offtake is unlikely to be swift since (i) a large minimum investment is required; (ii) a local partner willing to making a substantial investment is required; (iii) the States and Union Territories, which permit such investment are few diminishing the possibility of returns; and (iv) the reputational risk to the foreign investor, considering the divided public opinion and political sensitivity of this issue. In the circumstances, only large foreign supermarket chains like Tesco, Carrefour, etc. are likely to consider investments. Political controversy also continues on this issue with the opposition parties seeking a vote in Parliament on the Government’s decision. The efficacy of such a vote is unclear since the Government is entitled to take executive action on this issue without Parliamentary sanction.

]]>The Indian supreme court on the scope of jurisdiction of the indian capital market regulatorhttp://legalknowledgeportal.com/2012/12/04/the-indian-supreme-court-on-the-scope-of-jurisdiction-of-the-indian-capital-market-regulator/
Tue, 04 Dec 2012 10:32:55 +0000http://legalknowledgeportal.com/?p=2998Recently, the Indian Supreme Court ruled on the scope of jurisdiction of the Indian capital market regulator, the Securities and Exchange Board of India (SEBI), over an issue of securities by a public company in India. In Sahara India Real Estate Corporation Ltd. and Others v. Securities and Exchange Board of India and Another.[1], two unlisted public companies of the Sahara Group, Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) had issued and allotted unsecured Optionally Fully Convertible Debentures (OFCDs) to approximately 30 million investors on a private placement basis and collected an amount of approximately INR 240 billion from such investors. SIRECL and SHICL had issued the OFCDs based on an information memorandum (IM) circulated to the investors and a red herring prospectus (RHP) filed and registered with the Registrar of Companies. These companies had not met the filing, disclosure and investor protection requirements of Indian securities law that would apply to a public issue of securities on the ground that the issue was a private placement. SEBI ordered SIRECL and SHICL to refund the investment amount to the investors with interest of 15% per annum under Indian securities laws on the ground that the issue of OFCDs was a public issue and the statutory requirements for such an issue had not been met. SEBI’s order was upheld by the Securities Appellate Tribunal. SIRECL and SHICL appealed to the Supreme Court. Dismissing the appeal, a two judge bench of the Supreme Court, held that under Indian securities laws:

(i) an offer of securities made to more than 49 persons would be a public offer. Therefore, the issue of OFCDs by SIRECL and SHICL was a public offer;

(ii) a company making a public offer is required by law to list the securities on a recognized stock exchange and meet the filing, disclosure and investor protection requirements of a public issue. SIRECL and SHICL had not met these requirements and had not applied for listing;

(iii) SEBI would have jurisdiction over a public offer by a company since the “intention to list” is manifest in the mandatory requirement under law to list such an issue;

(iv) SEBI was justified in ordering SIRECL and SHICL to refund the investment amount to the investors with interest of 15% per annum.

This judgment clarifies that SEBI’s jurisdiction cannot be questioned if a company makes a public offer of securities. Under Indian law, a private placement requires (i) an offer or invitation to less than 50 persons; and (ii) the offer or invitation should either be non-transferable or the domestic concern of the offeror and offeree. If any of these conditions are not met, the issue of securities by the company would be a public offer.

This decision is welcome since it recognizes the importance of SEBI in an issue of securities to the public. Tasked with the duty to protect investors and regulate the securities market, a purposive interpretation is critical to ensure that SEBI’s authority to regulate a public issue of securities is not undermined by a technical interpretation of Indian securities laws. This judgment makes such a purposive interpretation.

• The Government of India, vide the Finance Act, 2012, introduced a provision under the Income-Tax Act, 1961 (IT Act) which required a non resident taxpayer to mandatorily furnish a Tax Residency Certificate (TRC) in the prescribed format for claiming relief under the Double Taxation Avoidance Agreement (DTAA) entered into between India and the country of residence of such a taxpayer. The TRC, to be obtained from the government of the country of residence of the non-resident taxpayer, is necessary but not a sufficient pre-condition to avail benefits under the relevant DTAA.

• In this connection, the Central Board of Direct Taxes (CBDT) has now notified a new rule (Rule) in the Income Tax Rules, 1962, vide Notification No 39 dated 17 September 2012, prescribing the particulars to be mentioned in the TRC which the government of the country of residence of the non resident taxpayer would issue. Interestingly, though the provisions of the IT Act did not provide for a format to furnish the TRC by an Indian resident taxpayer for claiming a DTAA benefit, the CBDT in the Rule has also specified a format and procedure for the TRC to be obtained by a resident.

• The Rule applies to any person claiming relief under the DTAA including residents and it comes into force on 1 April 2013 (Financial Year 2012-2013).

• This ERGO Newsflash discusses the important parameters laid down by the CBDT in relation to the format and procedure for obtaining a TRC by both residents and non residents.

For Non Residents

The Rule does not provide for any specific format of the TRC in case of a non resident taxpayer. However, it provides that the TRC issued by the government of the country of residence of the non resident taxpayer should contain the following information:

• Nationality in the case of individual taxpayers or country or specified territory of incorporation or registration in the case of other taxpayers;

• Tax identification number of the taxpayer in the country or specified territory of the taxpayer’s residence. In case there is no such tax identification number then, a unique number on the basis of which the taxpayer is identified by the Government of the country of residence of the taxpayer;

• Residential status for the purposes of taxation;

• Period for which the TRC is applicable; and

• Address of the taxpayer for the period for which the TRC is applicable.

For Residents

• The prescribed form is Form 10FA.

• In addition to details such as name, status, nationality / country of incorporation, address, email ID, Permanent Account Number (i.e. PAN), Tax Deduction Account Number (i.e. TAN), the Form requires the applicant / taxpayer to state the purpose of obtaining the TRC as well as the period for which the TRC is requested. A resident taxpayer is also required to provide documentary evidence supporting its claim for being a tax resident of India.

• The Tax Authorities on receipt of the above Form and on being satisfied about the details provided and required for the TRC, are required to issue the TRC in a separate form (viz Form 10FB).

KCO Comments

• The contents prescribed in the TRC for a non resident are rather simple and straightforward and they don’t appear to encroach upon the sovereign authority of any jurisdiction in this regard. Most of the particulars prescribed are similar to those found in the TRCs currently being issued by countries such as Mauritius.

• The requirements for a resident to obtain TRC seem to be quite interesting. It appears that the intention here is to streamline the process for claiming credit for the taxes paid by a resident in another jurisdiction.

• Though the much awaited requirements for claiming benefits under a DTAA have now been made available, however, since TRC is not the only pre-condition to avail benefits under the relevant DTAA, a non resident would still need to satisfy the Tax Authorities on other elements such as genuineness of the transaction, no round tripping, etc., to claim the benefits under the DTAA.

]]>India – United states cooperation on competition law – heightening the need for compliancehttp://legalknowledgeportal.com/2012/10/05/india-united-states-cooperation-on-competition-law-heightening-the-need-for-compliance/
Fri, 05 Oct 2012 08:01:13 +0000http://legalknowledgeportal.com/?p=2667On 27 September 2012, the Competition Commission of India (CCI) signed a Memorandum of Understanding on antitrust cooperation (MoU) with the US Federal Trade Commission (FTC) and the US Department of Justice (DOJ), Antitrust Division, which are the 2 key US federal antitrust / competition enforcement agencies. The MoU enables both countries to cooperate on competition law investigations and also allows the Indian and US regulators to share information on investigations and consult on enforcement and policy issues.

In addition to the US MoU, the CCI has also signed similar agreements with Russia and is at an advanced stage of negotiation for entering into MoUs with China, South Africa, Indonesia, Japan, the United Kingdom, and Brazil. Through economic agreements with other countries that are currently in progress, the CCI may soon have similar agreements with the European Union, New Zealand, and Australia.

KCO Comment:

India’s entering into a MoU with the US is a signal event in the short history of Indian competition law. For example, the US has long used internationally coordinated dawn raids (i.e., unannounced search and seizures) with other competition regulators as a potent weapon to find information about cartels. The MoU means that the DOJ and FTC will closely liaise with their Indian counterpart, the CCI, most likely in relation to international cartels involving the two countries.

In addition, these arrangements help give effect to the extra-territorial operation of the (Indian) Competition Act, 2002, as amended, (Competition Act) under Section 32, which provides that the CCI can investigate and issue orders against activities taking place outside India but having anticompetitive effects within India. However, as a practical matter, unless India enters into these MoUs and bilateral arrangements with other jurisdictions, the CCI cannot effectively enforce this power.

As was seen in the orders of the CCI dated 20 June 2012 and 30 July 2012 in the cement cartel cases, the CCI is issuing exceedingly high fines for breaches of the Competition Act. Now that the CCI has the ability to cooperate with countries like the US on competition law enforcement, it becomes all the more critical for companies to achieve compliance as soon as possible, such as by implementing a strong compliance programme, a dawn raid preparedness plan, and a sound document retention plan.

]]>Supreme court clarifies jurisdiction of domestic courts in international commercial arbitrationshttp://legalknowledgeportal.com/2012/09/18/supreme-court-clarifies-jurisdiction-of-domestic-courts-in-international-commercial-arbitrations/
Tue, 18 Sep 2012 06:34:33 +0000http://legalknowledgeportal.com/?p=2484On 10 January 2012, a five-judge constitution bench of the Hon’ble Supreme Court of India (Supreme Court) reconsidered its earlier controversial ruling in Bhatia International v Bulk Trading SA case (Bhatia Judgement) concerning applicability of Part I of the (Indian) Arbitration and Conciliation Act, 1996 (Act) to arbitrations which are held outside India.

In the Bhatia Judgement, the Supreme Court considered a request for interim relief under Part I of the Act by a party to International Chamber of Commerce arbitration in Paris. A three-judge bench of the Supreme Court held that the provisions of Part I of the Act would also apply to international commercial arbitrations held outside India, unless the parties had expressly or impliedly excluded application of the Part I of the Act. The reasoning underlying the judgement was that Section 2(2) of the Act did not limit the applicability of the Part I to arbitration proceedings in India.

The Supreme Court, vide its judgement today, has held the following:

– The ratio laid down in the Bhatia Judgement and Satyam v Venture Global (Venture Global Judgement) does not flow from the provisions of the Act and accordingly, the same has been overruled to the extent that Part I of the Act would apply to arbitrations held outside India unless application of Part I of the Act is expressly or impliedly excluded;

– It is crystal clear from the language of section 2(2) of the Act that Part I of the Act is applicable to only those arbitrations, which are held within India and that it is not applicable to arbitrations held outside India. Thus, the crucial point for determining whether or not Part I of the Act is applicable is whether the seat of arbitration is in India or not;

– Indian courts will have no supervisory jurisdiction to make provisions of Part I of the Act applicable to an award made outside India;

– The argument that the courts of the country of the seat of arbitration and also those of the country, whose law is chosen by the parties, have concurrent jurisdiction over any court proceedings in relation to such awards is incorrect. Only the courts of the country in which the seat of arbitration is located, has the jurisdiction to entertain any matter relating to the arbitration. It is only in the absence of choice of seat of arbitration that the country whose law is chosen by the parties has jurisdiction to entertain the matter;

– The argument that provisions of Part II of the Act are supplementary to the provisions of Part I is incorrect as there is complete segregation between the two. While Part I deals with the commencement, conduct, challenge and enforcement of arbitrations taking place in India, Part II only deals with the commencement and enforcement in relation to foreign awards;

– It has been also clarified that since none of the provisions of Part I of the Act are applicable to arbitrations held outside India, provisions such as those for interim relief under Section 9 (Part I), would also not be applicable to arbitrations held outside India. The argument that Section 9 happens to be a sui generis provision or standalone provision has also been rejected. It also follows that parties would not be free to institute a civil suit in India for obtaining interim relief if the seat of arbitration is located outside India. The argument that in such a scenario, parties would be left without a remedy was rejected as the parties are free to seek appropriate remedies in their chosen jurisdiction;

– When the courts are faced with challenges made to a foreign award under Part II of the Act, the courts cannot go into the merits of the same or annul the award on the ground that the Indian law was excluded by the parties;

– It has also been clarified that the law laid down by the Supreme Court today would only apply prospectively to arbitration agreements entered into hereafter.

KCO Comment: This salutary judgement will have far reaching effects on arbitration in commercial transactions. It restores the original intention of the Arbitration Act and sets aside the judicial aberration created on enforceability of international arbitral awards in India.

]]>Sebi introduces new mechanisms for achieving minimum public shareholding requirementshttp://legalknowledgeportal.com/2012/09/11/sebi-introduces-new-mechanisms-for-achieving-minimum-public-shareholding-requirements/
Tue, 11 Sep 2012 08:05:27 +0000http://legalknowledgeportal.com/?p=2493Pursuant to the decision taken at the meeting of the Board of Securities Exchange Board of India (SEBI) held on 16 August 2012, SEBI vide its Circular No CIR/CFD/DIL/11/2012 dated 29 August 2012 (Circular) has introduced additional modes of compliance with the minimum public shareholding requirements to be followed by listed companies as contemplated under Rule 19(2)(b) and Rule 19(A) of Securities Contract (Regulations) Rules, 1957 and Clause 40A of the Listing Agreement. This is a welcome respite for listed companies which are currently non-compliant, given that the deadline for ensuring compliance with Clause 40A of the Listing Agreement is June 2013.

The following two new methods have been introduced by the Circular:

– Rights Issues to public shareholders, with promoters / promoter group shareholders forgoing their rights entitlement; and

– Bonus Issues to public shareholders, with promoters / promoter group shareholders forgoing their bonus entitlement.

The aforementioned methods are in addition to the already existing methods under Clause 40A of the Listing Agreement, being follow-on public offer, offer for sale, and institutional placement programme.

Interestingly, by virtue of the Circular, listed companies desirous of achieving the minimum public shareholding by modes other than the available modes, are permitted to approach SEBI with the appropriate details. Further, as per the Circular, any requests seeking relaxations from the available methods would be considered by SEBI based on facts involved and would be approved at its discretion. SEBI shall also make efforts to give its decision within thirty days of receipt of such requests.

Customarily, in cases of rights and bonus issues, all shareholders (including promoters) are entitled to their rights based on their current holding. Therefore, SEBI has opened an avenue through renunciation of rights entitlement and bonus shares for complying with the minimum public holding requirements by allowing promoters of a listed company, undertaking the rights and bonus issue, to forego their entitlement of shares in such issues. As the (Indian) Companies Act, 1956 does not contemplate renunciation of bonus shares, this particular mode may be a subject matter of further debate.

The introduction of these modes of increasing public shareholding seem to be SEBI’s response to various requests from non-compliant companies for permitting additional methods of compliance with the existing law. The methods existing prior to the Circular did not seem feasible in situations involving under-performing companies and non-availability of interested investors, given the existing financial uncertainty.

]]>Reverse charge of service tax on directors remunerationhttp://legalknowledgeportal.com/2012/09/06/reverse-charge-of-service-tax-on-directors-remuneration/
Thu, 06 Sep 2012 12:36:56 +0000http://legalknowledgeportal.com/?p=2473The changes ushered in by the Finance Act, 2012 have resulted in the taxing of a host of services which were earlier outside the service tax ambit. One such service which now falls in the service tax net is service rendered by the directors of a company.

Services provided by an employee to an employer in the course of employment are specifically excluded from the definition of service, thus, remuneration paid to executive directors under employment contracts are not subject to service tax. However, services provided by other directors (not covered under an employment contract) to a company are taxable.

The Central Government vide notification no 45/2012 – ST and notification no 46/2012 – ST, both dated 7 August 2012 has shifted the liability for payment of service tax from the director to the company. Thus, in respect of services provided by the director of a company to the company, such company would be liable to pay service tax on remuneration paid to such directors.

This reverse charge is effective from 7 August 2012. Thus, directors would remain liable to pay service tax only on remuneration received by them during the period from 1 July 2012 to 6 August 2012 if the aggregate value of all taxable services provided during the preceding financial year or during the above referred period in the current year exceeds INR 1 million.

Under the Foreign Exchange Management Act, 1999, the Reserve Bank of India (the “RBI”) issues directions to authorized dealers (“AP Dir Circulars”) from time to time. Further, it issues subject specific master circulars in July each year that consolidate all AP Dir Circulars issued by it since last July on the subject. This article covers the significant changes to the Master Circulars governing Foreign Investment in India and Direct Investment in Overseas Companies issued by the RBI on 2 July 2012.

Master Circular on Foreign Investment in India

Transfer of shares – Certain transfers of shares between resident and non-residents (and vice versa) have been permitted without the requirement of obtaining prior RBI approval even if such transfers do not meet the pricing norms specified by the RBI; provided, these transfers meet certain other conditions including pricing norms specified by the Securities and Exchange Board of India (the “SEBI”). Certain other relaxations have also been included in relation to transfer of shares of a non-banking finance company.

Investment by foreign venture capital investors – The circular also allows SEBI registered foreign venture capital investors to acquire shares from third parties as opposed to acquiring them only through an IPO or a private placement.

Shares against consideration in kind – Companies are permitted to issue shares against import of machinery with prior Government approval. However, the circular clarifies that this route will not be available where the imported machinery is second hand machinery.

Qualified Foreign Investors – The circular recognizes a new class of foreign investors called “qualified foreign investors” or “QFIs”. The RBI has prescribed various norms governing their investment in India.

Changes to Sectoral Conditions – The circular incorporates the various changes made to the sectoral conditions since last year. For instance, it mentions 100% investment being permissible in single brand retail, and it also clarifies that investment in brownfield pharma companies requires prior Government approval.

Increase in portfolio investment limits – Indian companies are permitted a total of 26% investment by foreign institutional investors and 10% from non-resident Indians under the portfolio investment scheme. These limits can be increased by a company to certain specified limits and companies are required to intimate the RBI of such an increase. The circular specifies that this intimation should be accompanied by a certificate from a Company Secretary certifying compliance with all related norms.

Master Circular on Overseas Investment

Earlier, in order for a foreign company to issue stock option plans to employees of an Indian company, it was required that the foreign company should directly to indirectly hold at least 51% shares in the relevant Indian company. This requirement has been done away with.

What is a Consent Order? A Consent Order is an order settling administrative or civil proceedings between the SEBI and a person who may prima facie, according to SEBI, be found to have violated securities law and related provisions. A Consent Order may settle all issues or reserve an issue or claim besides stating precisely what issues or claims are being reserved. A Consent Order may or may not include a determination that a violation has occurred.

Objective of Consent Order: The objective of a Consent Order is to provide flexibility of a wider array of enforcement and remedial actions which will achieve the multiple goals of an appropriate sanction, remedy and deterrence without resorting to lengthy litigation proceedings and incurring unwarranted delays.

STREAMLINING OF THE CONSENT PROCESS

Since the enforcement of the Guidelines, SEBI has passed several Consent Orders in a wide array of securities law. These include several high profile cases, some of which have also been highly criticised.

SEBI through its circular dated 25 May 2012 (Circular), has now modified the Guidelines to provide more clarity and made certain amendments to limit the scope of Consent Orders. This Ergo examines the significant changes brought about by the Circular.

a) Exclusion:

To tighten the existing Guidelines, SEBI has introduced several exclusions from the operation of consent order mechanism. The following defaults are excluded :

– Activities relating to insider trading;

– Serious fraudulent and unfair trade practices;

– Failure to make an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;

– Front Running, i.e. directly or indirectly dealing in securities upon holding of non-public information prior to a substantial order being placed or an impending deal in certain cases;

– Failure to make disclosures under the offer documents that would materially affect the rights of an investor;

– Non-compliance of summons issued or order passed by SEBI.

The High Powered Advisory Committee (HPAC) of the SEBI and the panel of Whole Time Members (WTM), however, are empowered to settle any of the defaults listed above based on the specific facts and circumstances of the case.

b) Revised Procedure:

Once an application for a Consent Order is made in the prescribed format containing all the necessary details / documents, the applicant will be required to appear before an internal committee comprising SEBI officials not associated with the case (Internal Committee). After the consent terms have been formulated in consultation with the Internal Committee and submitted by the applicant, they would have to be placed before the HPAC for their consideration and recommendation.

The recommendations made by the HPAC would then be placed before the panel of 2 (two) WTMs for their approval. The panel may increase or decrease the penalty or dismiss the application altogether. The manner in which benchmark amounts for each category of default would be calculated has been provided in the revised Guidelines. Factors that would be considered while arriving at the indicative amount (which is further calculated on the basis of the benchmark amounts) include stage of the proceeding, nature of the default / violation, gravity of the default / violation, volume traded, price impact, net worth, profits made, nature of disclosure not made, its impact, etc.

The consent terms finally approved by the panel of WTMs, i.e. the Settlement Amount (SA), would then be communicated to the applicant. The applicant is required to send its acceptance of the terms and remit the SA in lump sum, within 15 (fifteen) days from the date of receipt of the intimation. In case of non-acceptance of the SA and directives, if any or non-communication of acceptance within the stipulated time, the application shall be treated as rejected. Applicants cannot re-apply for a Consent Order once an application is rejected in relation to the same violation.

The application for a Consent Order shall be disposed of expeditiously, preferably within 6 (six) months of the application and the Circular will apply to all the new applications and the pending applications, except those which are already pending before the HPAC or cases pending at any stage thereafter.

IMPACT OF THE CIRCULAR

It could be concluded that while the reforms will have the effect of streamlining the process and making the mechanism more transparent, the Circular substantially limits the scope of the Guidelines to minor offences. For all excluded categories of cases (listed above), a party may be unable to resort to these Guidelines unless the HPAC / WTM is satisfied otherwise, based on the facts and circumstances of the matter. Further, the eligibility to make an application under the Guidelines is being rationalised and more stringent conditions have been prescribed.

Under the Mauritius Treaty, capital gains arising to a resident of Mauritius from sale of shares of an Indian Company are exempt from tax in India under Article 13(4) of the Mauritius Treaty.

Dynamic India Fund I (Applicant), a company incorporated in Mauritius, was holding a valid Tax Residency Certificate (TRC) issued by the Mauritius Revenue Authority (MRA) and was registered as an FVCI with the Securities and Exchange Board of India.

The Applicant did not have a ‘permanent establishment’ in India. It had invested in shares of different Indian companies and proposed to sell some of those shares on which it expected to realise capital gains.

It applied for an advance ruling before the Hon’ble AAR on the question whether capital gains arising on sale of shares of the Indian companies would be exempt from tax in India under Article 13(4) of the Mauritius Treaty and consequently, the buyer would not be required to withhold any tax.

While allowing the benefit of capital gains tax exemption in India, the Hon’ble AAR has followed and applied the landmark ruling of the Supreme Court of India (SC) in the case of Azadi Bachao Andolan (SC Ruling). As is widely known, in order to provide certainty and clarity to foreign investors, the Central Board of Direct Taxes (CBDT), Ministry of Finance, Government of India had issued Circular No 789 dated 13 April 2000 (Circular) to the effect that where a TRC is issued by the MRA, such certificate will constitute sufficient evidence for accepting the status of residence of the Mauritius entity as well as the ‘beneficial ownership’ of the shares for applying the Treaty. The validity of this Circular was later upheld by the SC Ruling.

Advance Ruling

The Hon’ble AAR ruled that capital gains arising on sale of shares of the Indian companies would be exempt from tax in India under Article 13(4) of the Mauritius Treaty read with the SC Ruling.

While ruling on the availability of tax exemption in India, the Hon’ble AAR rejected the following arguments of the Tax Authorities:

– Treaty benefit is to be denied as it is a case of treaty shopping since majority of investors of the Applicant are not from Mauritius

The AAR observed that in light of the SC Ruling, treaty shopping is not prohibited under Mauritius Treaty[1]

– Since no capital gains tax is actually levied in Mauritius, benefit of a Tax Treaty is not to be allowed

The AAR observed that this aspect of law is already dealt with in the SC Ruling and therefore, is not open to this Authority to entertain this argument of the Tax Authorities. The SC Ruling is binding on this Authority and therefore, if desired, the Tax Authorities will have to canvass such questions before the SC.

– Some of the members on the board of the Applicant were Indian residents and therefore, the Mauritius Company was controlled from India

The AAR noted that apart from some Indian residents being on the board of the Applicant, there were two local resident directors in Mauritius and a few other non-resident directors. Therefore, it cannot be said that the Applicant was controlled from India. It also observed that the Tax Authorities did not produce adequate material to support their contention that the control of the Mauritius Company was really in India to deny them treaty benefit.

– The amendment to Indian tax laws by the Finance Act, 2012, that a TRC should contain prescribed details and particulars for a non-resident to claim benefit of tax treaty in India, will also come into force from the next financial year (FY), i.e. FY 2013-14[2].

The AAR observed that the GAAR provisions have no relevance here as they would come into effect only from 1 April 2013 and it will be open to the Tax Authorities to consider these aspects as and when they come into force notwithstanding this ruling.

Accordingly, the AAR concluded that capital gains arising in India from the proposed sale of shares of Indian companies would be exempt from tax in India under Article 13(4) of the Mauritius Treaty and accordingly, there will be no obligation on the buyer to withhold any tax in India.

Concluding Comments

This is a welcome ruling which has followed the settled legal position on applicability of the Mauritius Treaty based on the SC Ruling. This AAR ruling will be reassuring for foreign investors and will help clearing any uncertainty surrounding application of the Mauritius Treaty based on the current law. The AAR has taken a consistent view on applicability of the Mauritius Treaty in various cases like E*TRADE Mauritius, Ardex Investments, etc.

From the perspective of M&A transactions, deal structuring, etc, with one more such ruling in place, where a judicial forum has once again reiterated the applicability of the Mauritius Treaty to foreign investors, one hopes that such rulings consistently restating the legal position on the subject, should give added comfort to buyers while making payment to Mauritius companies for not having to withhold any tax in India.

[1] There is no ‘limitation of benefits’ article under Mauritius Treaty unlike India-US Treaty. In light of this, the Supreme Court in Azadi Bachao case had held that treaty shopping was not prohibited under Mauritius Treaty for various economic and political reasons

[2] Apparently, there seems to be an error on the date of entry into force of this provision as it comes into force in the current financial year, i.e. FY 2012-2013

CCI acted on a complaint filed by the Builders’ Association of India in July 2010.

CCI found:

a) the existence of price parallelism among the cement manufacturing companies;

b) increase in prices after CMA meetings;

c) low levels of capacity utilization and reduced production which were not linked to market forces;

d) dispatch parallelism among the cement manufacturing companies; and

e) super-normal profits earned by the cement manufacturing companies.

In addition, CCI also found some inconsistencies in the statements made by various parties (about whether or not they attended certain meetings of the CMA) and observed that the parties were not being completely forthright.

It appears that the Builders’ Association of India had filed the complaints against these companies – CCI has stated that it is these 11 companies that are the “major players” and that the other companies only follow them. The other case, involving around 40 cement companies (also filed by the Builders’ Association of India before the MRTPC) is still pending before CCI.

As concerns the penalty CCI has compared 10% of the turnover of each of the companies with 3 times the profit and found that in all cases, 3 times the profit was higher. As per the proviso to Section 27(b) of the Competition Act, 2002, therefore, it has imposed a penalty of 0.5 times the profit of each company (although the maximum would be up to 3 times the profit for each year of continuance of the offence).

In a recent order, CCI has imposed the maximum penalty of 10% of the turnover for each year of continuance but in this case, for the first time, it has compared 3 times the profit with 10% of the turnover of each of these companies, to determine which is higher. However, it has limited the penalty to 0.5 times of the profit, which is perhaps a welcome concession given the magnitude of the penalty.

As compared to the VCF Regulations, the AIF Regulations cast a much wider net to include private equity funds, real estate funds, hedge funds and also existing capital pools that were not required to be registered under the VCF Regulations. Now all kinds of pooled investment vehicles will be required to seek registration with SEBI under the AIF Regulations. However, mutual funds, collective investment schemes, family trusts, employee stock option plan trusts, employee welfare trusts, holding companies, funds managed by asset reconstruction companies, securitization trusts and other entities that are regulated by any other regulator in India have been exempt from registering again with SEBI under the AIF Regulations.

2 Applicability to existing funds registered under the VCF Regulations:

Existing VCFs would be regulated by the VCF Regulations until the funds themselves or the schemes being managed by them are wound up, but the VCFs would neither be able launch a new scheme nor increase the target corpus of the existing schemes or of the funds themselves. However, these VCFs can migrate to the AIF regulatory regime by re-registration under the AIF Regulations on obtaining approval of two-thirds of their investors. We anticipate that only those funds which are fully invested will choose to remain outside the AIF regulations.

3 Categories:

The AIF Regulations have categorized funds into the following three categories:

(i) Category I AIF to include VCFs, small and medium enterprise funds, social venture funds, infrastructure funds and such others as may be specified.;

(ii) Category II AIFs to include those funds that are not classified as Category I or Category III and which do not undertake leverage or borrowing activities other than to meet day-to-day operational requirements and as permitted in the AIF Regulations.; and

(iii) Category III AIFs to include hedge funds that are considered to have negative externalities such as exacerbating systemic risk through leverage or complex trading strategies. In addition to this the three categories will differ based on the government incentives which could change over the life of a fund.

4 Management Interest:

Investment managers and/or sponsors are required to contribute 2.5% of the initial corpus or INR 50,000,000, whichever is lower, for Category I and Category II AIFs and 5% or INR 100,000,000 for Category III AIFs. Market practice for the manager’s ‘skin in the game’ is between 1% to 2% of the fund size and this requirement could prove to be a challenge for newer managers and should have been a matter best left to be agreed by the manager and the investors. In addition to this, employees or directors of the fund or of the manager will have to make minimum cash investment of INR 2,500,000 in the fund which may be a daunting task for social venture funds.

5 Corpus, Membership and Tenure of the AIF:

A minimum corpus of INR 200,000,000 and each investor having to invest a minimum of Indian Rupees 10,000,000 means that only institutions, high net worth individuals (HNIs) and family offices will have access to AIFs. By limiting investors in an AIF to one thousand, SEBI has sought to close the door on companies raising large sums through the private placement route without registration with SEBI. While Category I and Category II AIFs are required to be close-ended with a minimum tenure of three years, Category III AIFs may be either close-ended or open-ended. The term of an AIF may be extended for a period up to two years subject to approval of two-thirds of the investors. In any other case an AIF will be required to liquidate within one year of its term.

6 Listing of AIF units and regulation of investments:

SEBI has permitted units of close ended AIFs to be listed on stock exchanges after final closing, subject to the scheme being of a minimum tradable lot of INR 10,000,000. Investment by all categories of AIFs will be subject to the following conditions: (i) AIFs may invest in securities of companies incorporated outside India subject to such conditions or guidelines that may be stipulated or issued by the Reserve Bank of India and SEBI from time to time. (ii) Co-investment in an investee company by a manager or sponsor cannot be on terms more favourable than those offered to the AIF. (iii) AIFs cannot invest in associates except with the approval of 75% of investors. (iv) The un-invested portion of the corpus may be invested in liquid mutual funds or bank deposits or other liquid assets of higher quality such as treasury bills, collateral borrowing and lending obligations, commercial papers, certificates of deposits, etc. until the deployment of funds as per the investment objective. (vi) AIFs may act as a nominated investor i.e. as a qualified institutional buyer or private equity fund in accordance with SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009.

Category I and Category II AIFs have not been permitted to invest more than 25% and Category III AIFs have not been permitted more than 10% of their investible funds in one investee company.

7 Other Compliance:

It is mandatory for an AIF to file a placement memorandum or an information memorandum along with the requisite fees at least 30 before launching a new scheme. Unlike the VCF Regulations, the AIF Regulations prescribe very detailed requirements that need to be provided in the private placement memorandum. AIFs are also required to provide financial information of portfolio companies and material risks along with an analysis of how these are managed by them to the investors on an annual basis.

8 Insider trading and AIFs:

An interesting aspect of the AIF Regulations is that it has created an exemption from Regulations 3 and 3A of SEBI (Prohibition of Insider Trading Regulations), 2009 (Insider Trading Regulations) for Category I and Category II AIFs for their investments in companies listed in Small and Medium Enterprises (SME) Exchanges or on the SME segment of a stock exchange provided that (i) the AIF conducts due diligence prior to such investment; (ii) discloses such investments within a period of two days of such investments to the stock exchange where the companies are listed; and (iii) the investment has been locked in for a period of one year from the date of such investment. This suggests that the Insider Trading Regulations apply to subscription of shares of listed companies, a principle that has been rejected by the Securities Appellate Tribunal. If indeed SEBI expects potential investors subscribing to shares of a listed company to comply with Insider Trading Regulations and not to be treated in the same way as companies listed on the SME Exchanges, there can be no PIPE investments. This will clearly require an amendment to the Insider Trading Regulations and this attempt merely sets out a regime for the SME segment which is still at a very nascent stage of development and could well have been extended to all AIF investments thereby codifying market practice.